OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following Mesquite Independent School District (ISD), TX's unlimited tax (ULT) refunding bonds:

--$39.9 million ULT refunding bonds, series 2016A & 2016B.

The bonds are scheduled for negotiated sale the week of June 27th. Proceeds will be used for debt service savings.

The 'AAA' rating on the bonds is based on a guaranty provided by the Texas Permanent School Fund (PSF), whose bond guaranty program is rated 'AAA' by Fitch. In addition, Fitch has assigned an underlying rating of 'AA+' to the bonds, and affirmed $460.1 million in outstanding unlimited tax obligations (pre-refunding) and the district's Long-Term Issuer Default Rating (IDR) at 'AA+.'

SECURITY

The bonds are payable from an unlimited property tax levy and are further backed by the PSF bond guaranty program. (For more information on the Texas Permanent School Fund see 'Fitch Affirms Texas PSF Rating at 'AAA'; Outlook Stable', dated Aug. 5, 2015).

KEY RATING DRIVERS

The 'AA+' rating reflects the district's sound economic underpinnings and strong gap-closing capacity from a combination of solid spending flexibility and reserves. Long-term liabilities and fixed costs may increase as a result of planned debt issuances but are expected to remain within Fitch's moderate range.

Economic Resource Base

This mature, suburban district is located 35 miles east of downtown Dallas and serves an estimated population of roughly 180,000 in the cities of Mesquite, Balch Springs, Seagoville, and Garland. Current enrollment of about 40,500 is up 1% from last year. Wealth levels trail those of the larger DFW metro area.

Revenue Framework: 'a' factor assessment

Revenue growth has been strong, averaging at a level in excess of the national GDP for the 10 years through 2014. Future growth will likely track enrollment growth given the state funding framework, with the district's independent legal ability to raise revenues limited by state law.

Expenditure Framework: 'aaa' factor assessment

The district is stable and maintains strong expenditure flexibility in salaries and paygo capital spending. Spending growth is expected to trend in line with revenue growth. The low fixed-cost burden for debt service and retiree benefits reflects state-support for long-term liabilities. There are no contractual obligations.

Long-Term Liability Burden: 'aa' factor assessment

The long-term liability burden is moderate, reflecting strong state support for retiree benefits. The district remains with almost $200 million in bond authorization from its 2015 election that it plans to issue in coming years to expand classroom capacity throughout the district. Fitch expects that the liability burden will remain moderate even with this issuance.

Operating Performance: 'aaa' factor assessment

The district has a strong history of operating surpluses; reserves are robust and provide ample cushion in the case of an economic downturn.

RATING SENSITIVITIES

Strong Revenue Growth: The continuation of strong revenue growth will help maintain the 'AA+' rating.

CREDIT PROFILE

The district's proximity to Dallas and its location in the broader DFW metro area provides residents with easy access to a large and diverse labor market. The area is home to numerous corporate headquarters, and prominent economic sectors include transportation, financial services, wholesale trade, manufacturing, oil/gas, and education and government.

The city of Mesquite and the surrounding DFW region have added jobs at a rate faster than the nation since the recession ended in 2009. Mesquite's April 2016 unemployment rate was a low 3.5% due to strong employment growth in the city.

Revenue Framework

State sources remain the largest revenue stream, comprising about three-quarters of general fund monies; property taxes account for about 20%. Revenue growth is primarily a function of enrollment as the state seeks to ensure a certain level of per pupil spending for all state school districts and the district's revenue raising ability is limited. Enrollment growth has averaged between a manageable 1%-2.5% per annum in the last 10 years, and the district expects similar growth in the near term.

The compound annual growth rate (CAGR) of district revenues was one percentage point higher than the U. S. GDP over the 10 years through 2014. Fitch anticipates modest enrollment growth will continue to drive revenue growth in excess of national averages.

The district's M&O tax rate of $1.04 per $100 taxable assessed value (TAV) is $0.13 below the legal limit of $1.17. The district would need voter authorization to raise the rate and there are no current plans to do so. The district levies a separate, unlimited debt service tax rate that stood at $0.37 per $100 TAV as of fiscal 2016. Throughout the issuance of their bond authorization, management anticipates having to raise the rate to $0.42 per $100 TAV, leaving margin under the Attorney General's new money limit of $0.50. The tax rate projection is based on modest TAV and enrollment growth assumptions, which Fitch believes are reasonable given recent history.

Expenditure Framework

The district's main expenditure item is salaries, common for local governments. Adopted budgets typically include raises for teachers and staff and some substantial use of operating revenues for capital projects.

The pace of spending growth has somewhat trailed revenue growth due to consistent, albeit modest, enrollment gains and underspending of budgeted expenditures. This trend is likely to continue barring any changes in district policy.

The district's fixed-cost burden is moderately low, with carrying costs for debt, pensions and other post-employment benefits (OPEB) equaling a low 6.4% of 2015 governmental expenditures taking into account state support for debt service. Fitch expects the fixed-cost burden to rise slightly as the district issues the remaining debt authorization over the mid-term, but to remain low given the strong state support for retiree benefits and the current debt structure. The district retains flexibility in staffing levels given the modest growth prospects, and does not have any labor contracts or wage pressure.

Long-Term Liability Burden

The district received a strong 77% voter support for its 2015 bond program. The first of five installments was issued in the fall of 2015, and the district plans to issue the remaining installments through 2020 in order to expand classroom capacity at district facilities. If the current authorization is issued as planned, Fitch anticipates the district's debt burden will rise but remain a moderate burden on recourses.

The district participates in the Texas Teachers Retirement System (TRS), a cost-sharing multiple employer pension system. Under GASB 67 and 68, TRS's assets cover 83.3% of liabilities as of fiscal 2015, a ratio that falls to 75% using a more conservative 7% return assumption. Like all Texas school districts, Mesquite ISD is vulnerable to future policy changes that shift more of the contributions and liabilities onto districts, as evidenced by a relatively modest 1.5% of salary contribution requirement that became effective in fiscal 2015.

The proportionate share of the system's net pension liability paid by the district is minimal, representing 0.6% of personal income. The district's contributions currently are limited to 1.5% of salaries (total contribution of $2.9 million in fiscal 2015).

Operating Performance

The district maintained a strong financial cushion despite recessionary pressures and state funding cuts. Moreover, the district retains adequate expenditure flexibility to manage well through economic downturns. General fund balances have grown steadily with expenditures, averaging about 30% of spending at year-end. Fiscal 2015 general fund reserves stood at a strong $98.7 million (31% of spending), and management projects fiscal 2016 will mark another year of positive operating results due to enrollment growth beyond expectations.

The operational impact of TAV declines is largely mitigated by the state's funding formulas, which backfill lost local revenues with additional state aid. This backstop serves to limit revenue volatility. Fitch expects that the district will maintain reserves throughout the economic cycle at levels well above the amount considered adequate for a 'aaa' financial resilience assessment.

The district has demonstrated a strong commitment to supporting financial flexibility. Budgeting is conservative and typically includes capital projects, and management has been proactive in maintaining operational balance throughout economic cycles.